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How will you create cash flow that requires minimal effort? On this Dentist Money™ Show, Reese and Ryan discuss something people love to daydream about – passive income. You’ll hear how real estate measures up to other passive income options and learn about the two main components of passive income. And you’ll find out what it means to harvest your assets correctly in order to make them last longer.

Reese: Because you’re wearing a tie, and now you’re all doctored up and excited.

Ryan: It was a big deal this morning as we entered the room…

Reese: It kind of confused me. I walked in and I’m like, “I have a tie on, but you do too. This feels formal… is it formal day?” And you’re like, “no, I still wear casual shoes, and it’s a thin tie…”

Ryan: It’s a thin tie, the button is unbuttoned…

Reese: Yeah, I could literally work out in this tie.

Ryan: We’re doing a little plug for the stretchy chinos at Banana Republic, but I could. I could squat in these pants; (laughs) they’re stretchy.

Reese: I have a story from a book called The Richest Man in Babylon. A little tribute: do you know when this was written?

Ryan: Let me guess… I would say hundreds of years ago. I would say maybe 19th century? Early?

Reese: Early 1800s? Man, no it was early 1900s, but I thought it was written in 1985 or something; I thought it was really new when I read it, and it was just using an old story. Do you remember the story of it though? Do you kind of remember the characters, and how it went?

Ryan: Yeah, I do. A little.

Reese: Well today we’re going to talk about passive income, and that is the thing that everyone always says is “hot!” Like, “that’s a hot topic!” Like, “I’m just trying to create some passive income for the future.” We are going to talk about that, but we are going to start with a little story from The Richest Man in Babylon.

Reese: That’s actually my kid’s nickname. Passive Income. I’m gearing him up to be an NBA basketball player, so I just actually call him “Passive Income.”

Ryan: Does he dunk?

Reese: Yeah. Well, I mean… it’s a Fisher-Price plastic hoop, and he launch-kicks it like an electronic ball-launcher that shoots up towards the basket with a spring-loaded action, but I mean he’s scoring, if you consider that a dunk.

Ryan: You may need to consider changing his name, just to like “Short-term Liability” (laughs). Alright, so in The Richest Man in Babylon, there’s this story about Arkad. He has these two friends that come to him, and Arkad at this point is re-telling the story of his life on how he became wealthy, and these two friends come to him and they say “hey, how is it that you are so wealthy and we’re so poor when we’ve worked harder than you our whole lives?” So, he learned a secret from a wealthy friend early in his life that he tried to practice, and the secret from his friend was this quote: he said, “I found the road to wealth when I decided that a part of all I earned was mine to keep, and so will you.”

Reese: So, what does he mean, the government steals it all from you?

Ryan: (laughs) Yeah, that’s exactly right. Savings rate!

Reese: Oh, so he can only keep some of it.

Ryan: Yeah. Now this book was written in the 1920s; the savings rate that they illustrate in the book was 10%. I don’t really feel like that’s going to be high enough for today’s modern dentist…

Reese: Because we live until we’re 110 years old, and we spend three times as much… our houses are five times as big.

Ryan: (laughs) We spend a lot of money, so let’s bump it to 20%. But it’s still the same thing: “when I decided that a part of all I earned to keep, and so will you.” So, this guy Arkad give some examples of him going through his life trying to start building his wealth. The first thing that he does is finds a brick maker and he gives the brick maker all of his money, because the brick maker said he was going to go on a journey to find rare gems and bring them back. Well what do you think happened? The brick maker isn’t a gem expert, and he lost his money.

Reese: So, the brick maker was going to travel the world to find gems, then couldn’t find them…

Ryan: Arkad is like, “here’s my money! Yeah, bring me some gems!” A little get-rich-quick. So, Arkad’s wealthy friend, after he lost the money he said, “every fool must learn, but why trust the knowledge of a brick maker about jewels?” And then he said, “he who takes advice about his savings from one who is inexperienced in such matters will pay with his savings for proving the falsity of their opinions.” Basically, you will pay with your savings for proving the fact that the brick maker does not know anything about jewel-finding.

Reese: Where did I see– somebody posted on Twitter that if you think it’s expensive to pay a professional, wait until you see how expensive it is to pay an amateur.

Ryan: Yeah, that’s kind of the same advice. Okay, so he gets the lesson of “save your money,” and then he tries to be too aggressive by giving it to somebody that doesn’t know what they are doing it, and he loses it. Then, the second thing he does is he goes and gives this money to a small business owner, who is a shield maker or a sword maker or something, and he starts receiving dividends from this guy’s business, but our little friend Arkad makes the mistake of spending all of the money he gets, all of the income from this business. He finally invests in a real business, but then he spends everything, goes back to his friend, and he tells him that he has been spending his money, and his friend tells him that he’s eating the children of his savings by spending it and not investing to.

Reese: Okay, so Arkad invests in a business, and then that business kicks off passive income, and then he just spent it all. Why didn’t he live by his rule of 10%?

Ryan: He did! He took his 10% and gave it to the brick maker first and lost it, and then the other year he took his 10% and put it in the shield maker’s business and then he spent it on “lavish feasts,” it said. That’s what you’d do!

Reese: I mean, it might be worth it. That’s one area where I would not fault him for spending the money.

Ryan: (laughs) Okay, I’m going to read you one more quote, and then I’m going to ask you a question. This is a guy named Scott Galloway. He’s a marketing professor at the NYU School of Business, and he’s a writer, an entrepreneur, and a blogger, and he said “the definition of rich is passive income that’s greater than your burn. My dad and his wife receive about $50,000 per year from dividends, pension, and social security, and they spend about $40,000 a year: they are rich. I have a number of friends who are in between $1,000,000 and $3,000,000, and with several children in Manhattan private schools, and ex-wife, a home in the Hamptons, and a lifestyle fitting of a master of the universe, they spend most of it, if not all: they are poor. So, by the time you’re thirty, you should have a feel for what your burn is. Young people are 100% focused on their earnings; adults also focus on their burn.” Here’s the theme for today, and we here it all the time: “Reese, I want to build passive income for the future.” What’s the first thing people say about that? “I need passive income; therefore, I’m going to… buy real estate?

Reese: (laughs) Yeah! That is what I was going to guess, is that what you are saying?

Ryan: Every time. The point of today’s show is that passive income is more than a certain type of investment; it’s have more than you spend. That’s why I love that quote, because the guy making $50,000 from his social security and his pension—that describes my father-in-law, by the way. He lives on like $3,000 a month and he makes $4,500 from his teacher’s pension and social security. He’s a rich man.

Reese: There’s like zero stress.

Ryan: He doesn’t have any, actually! He thinks his life is really good. On the other hand, there are people with extremely high incomes who spend all of it.

Reese: Well he knows his life is really good! He doesn’t think it.

Ryan: (laughs) Yeah, he does. So, the two things I want to talk about today are the notion that passive income is just a certain type of investment that people will sometimes kind of force themselves into because they think that that’s what they have to do—

Reese: Well I think that’s really good insight, and when I saw that you were working on this podcast outline, I was like “dang, this is a good topic,” because it is a very misunderstood concept that I feel like marketing pros and financial amateurs use as a way to manipulate people into doing things that they want them to do. For example, people sell books on this topic. People sell real estate on this topic. People sell books about real estate on this topic. People sell online kits. People sell coaching programs on just this word because the word itself evokes some kind of an insider’s track to wealth. Robert Kiyosaki made this concept super famous with his Rich Dad series, and with the Rich Dad board game, and for those of you who haven’t seen it, the whole concept is that you get enough property to where you’re getting enough income from these properties to where you don’t have to work anymore. It was marketed super effectively, and I’m not knocking on the concepts in his book in terms of invalidating everything. Real Estate is obviously a very valid source of passive income; there is a reason that it is so popular, and there is a reason that a lot of wealthy people own a lot of real estate. I just think that there is also a lot of other ways that are equally valuable ways to be financially independent, and I think it’s just important to clarify the definition.

Ryan: I was going to ask you that. How would we define for people out there that are thinking, “man, I don’t want to do dentistry forever… I have to have passive income in the future.” What does that mean, technically?

Reese: Before I jump into that, I wanted to ask you about the last part of that quote from that marketing professor that you mentioned: what was the last part that he said about adults and kids? That kind of caught my attention; I wanted to hit that one more time.

Ryan: Yes, he said “by the time you’re 30, you should have a feel for what your burn is. Young people are 100% focused on the earnings; adults also focus on their burn.”
Reese: I’m not sure if he meant this, but when I’m reading that, I’m thinking he’s kind of making a jab a little bit at what makes an adult… and how when you’re an adult, you’re finally conscious that you are burning through all of your cash, and your focused as much on your spending as you are on your earnings. I mean, I have earned more money than I ever thought I would earn, and I’m amazed at how fast that money can just go, and the more I make, the more I think “holy cow.” Your lifestyle just gradually increases, and you get gradually more comfortable, and it doesn’t really feel dramatically different. There’s a point where making money really feels great, and I do think that it’s a measurable point, somewhere slightly above the median income level—

Ryan: You mean like the happiness measure when people have measurably different levels of happiness and satisfaction? It’s under $100,000

Reese: Yeah, definitely there, and it is above $55,000, or right around there; there are meaningful differences, and when you get above that median level, you can start to notice it in a really meaningful way, but after that point—and it doesn’t take much, I mean just slightly above the median, and you’ll feel a similar amount of happiness and you will hundreds of thousands of dollars more, so I think it’s important just to own that a little bit, and just pause on that story, or on that quote that you shared and just say that I think passive income is as much about controlling expenses as it is growing your income.

Ryan: That’s what we thought about The Richest Man in Babylon, how he invested the right way the second time around, but he spent everything, and then that quote kind of ties it all in—it’s all your spending. Passive income has as much to do with what you spend, which is why one of the months during the year, we dedicate an entire thirty days to just talking about our clients’ personal spending—tracking how it has been trending over time, how it relates to their income and collection flows—it’s the denominator in probably half the calculations we running, and it is the determining factor on what you need for retirement and what you’re going to need to get there.

Reese: As you know, a real personal example for me is that I’ve just spent the last year to year and a half of my life working on a new construction home plan that has been my dream house and what my wife and I wanted, and ultimately, when it came down to it, I had the plans engineered, I thought I was done, I had my budget really dialed in, and where costs are at with construction right now –and for those of you building, you understand this—I mean there was an amount of money that was above and beyond what I really wanted to spend on a primary residence, because I know once that money goes in, I’m never getting it out. Any of you that have upgraded your lifestyle and moved into a nicer home, or a larger home, or a nicer finished home, you know that from that point, it’s difficult to make a downgrade. There are usually lateral moves sometimes, but it’s tough to like, step back. I mean, everyone talks about downgrading, but my experience is that—

Ryan: People downsize but they don’t downgrade.

Reese: Yeah, and they just transfer their equity. So, you’ll find that the harder the decisions are to make, and the more stressful they feel, it’s probably because they are the wrong ones. If you are stressing about something too much, and it’s causing you extended anxiety or extended periods of stress, and you just feel like it’s taking a long time to make a decision and you’re struggling with it, you probably haven’t found the right decision. That’s been my experience, at least, that the longer that something goes on feel stressful and feeling anxious, you’re probably just rushing something for where you’re at in your life; you’re not ready for that level of stress. The more stressful the decisions—they’re always stressful when you first address them, like the first you’re placing an implant, right? That should feel different than the hundredth time, and there’s a difference between the first time, and then a decision that just kind of lingers—something that just kind of lingers and is stressing you out over a longer, extended period of time. There’s a reason that you are having a reaction to that; there’s a reason you are feeling anxiety and stress about it, and in my experience, it is not good to continue to just push and go through that and just say over an extended period of time: “it’s just the way my life is. My life is just that way, and that’s the way it’s gotta be, and I can’t make that change and I’ve just gotta accept this as a fact.” Those feelings of stress and anxiety, they’re your body and your brain’s way of telling you that you are stretching yourself in a way that you are not prepared for, or that you are not mentally ready for, or you are trying to tackle something that is too big for your level of–

Ryan: or the solution isn’t that good of a solution.

Reese: Yeah, the solution you are pursuing is not the right solution, and once you find the right solution—and we’ve all had this happen—it’s just easy, then the tension goes away, and it’s like “okay fine, I’ll do that,” and you just move forward. And we find that with clients a lot, and sometimes our personal psychology fights—we fight the right decision because we want a different outcome, and we want a certain outcome in our practice and in our personal finances, we want a certain lifestyle, we want a certain object, we want a certain luxury, or we want a certain outcome for our business or a certain growth goal, or a certain size goal, a certain achievement, and we fight against maybe the right decision because we are trying to pursue the thing that we want, or that we think we should want, and it’s really complicated. I feel like that’s the challenge of personal financial planning, and that’s where a financial advisor really helps because they are unemotional, they can come in and that can look at your situation, and they can say “look, I’m just sensing that we’re constantly fighting against this—is there another solution?” You told me once something that stuck with me and that I thought was interesting on a decision I was making. You said, “don’t be afraid to look at the obvious,” or, I think the way you said it that stuck with me was “don’t be afraid to just look at the thing that you thought was not a possibility; don’t be afraid to look at the thing that you thought was never an option before.” It was one thing on my house remodel; I never thought that that was an option. It’s an old house, I don’t want to remodel it, I’m going to have this rotten hole in the wall that I am never going to be able to fix, or the plumbing is going to be some massive problem….

Ryan: You’re going to have some electrical problem like This is Us… don’t do that!

Reese: Yeah! And it’s going to be the worst like ever… I was living in this “that’s not a reward for my hard work” kind of mentality, like “that’s not a good outcome.”

Ryan: The whole last five minutes, you’re describing a behavioral trait called anchoring, where we get fixated on something, and not matter how rational or irrational it might be, that is the outcome, and it is so hard to detach from what we’ve anchored to and be like “man, I’ve been in this blinders on mode…” that’s the only way this thing could end, when there’s another option that’s totally viable and practical.

Reese: When people present you with that option though when you’re anchored, I don’t know if you want to hear it. I had a conversation three months ago with a friend in the same boat, and it was interesting to just see that I presented him an option for a better solution to one of his financial problems, and he went dark on me for like 45 days. He wouldn’t talk to me, he wouldn’t respond to texts or calls…

Ryan: When you hear truth though, you know when someone objectively is telling you something very rational, and it just stings.

Reese: Yeah, and you just don’t want to acknowledge it. You and I have both seen that: you’ve had that happen with me, and I’ve probably had that happen with you, because we give each other a lot of advice. Sometimes, I’ll go dark on you for a week or two, or you’ll go dark on me for three weeks. You’re like “I’m not gonna talk about it,” and I want to talk about it. Not that I’m anchored on item “A,” but I don’t want item “B” that you’re presenting me with.

Ryan: When “B” is totally fantastic.

Reese: Yeah, it’s actually the best option for me!

Ryan: If you never had known “A,” and only presented “B”, it would be like “aw that’s sweet, I’ll take “B” all day long! That’s a great path.”

Reese: Yeah, I feel like it’s really crucial. And as it relates to this passive income idea, I think that’s why passive income is such a dangerous topic, because most people are anchored to passive income being real estate; they’re anchored to this idea that “my passive income is tied to property.” That is one really great way to get passive income. I mean, if you’ve got a building that you can practice in and pay that thing off in exchange for a lease payment throughout your whole career and at the end of your career, you can put a little remodel money into it and put a tenant in there and have them sign a 10-year lease… I mean, it’s a great way to make a passive income. But I think that what people don’t realize… I had this happen to me on a passive income conversation this week over dinner with someone, when they said, “I am killing it in my rental property.” And I said, “Okay. Tell me about this; it sounds awesome! The rental market in your area must be amazing then!” And they said, “well I own this $600,000 property, it’s paid for free and clear, and I’m making $3,900 a month on it.” I forget, it was like $700,000- $750,000, maybe that was the value, and I just got my calculator out and I was just going through it, and it turned out that when I took the rent and I divided it into the value of the property, it was like 3.7%, or like 4% of the appraised value that they’re getting in rent, before they backed out property taxes, and before they—

Ryan: Oh before? So net was an inflation rate of return.

Reese: There was probably 3-3.5%. And this person, at dinner, was telling their spouse that they were making 8.5% on this rental, and I was like, “dang! That’s pretty unusual for that market.” For some markets that is the case, but for this particular market there is a ton of inventory, and I was just surprised that that was the case because I had seen other properties, and when I brought that up—this was a friend, and I was just like “hey, just so you know…” I poked my nose in. Ryan knows I get into other people’s business sometimes.

Ryan: It’s all good intentions.

Reese: I’m just trying to teach sometimes, okay? I’m trying to be a good friend to this guy, and I just showed him the numbers, and he was really bothered by it!

Ryan: (laughs) You ruined dinner.

Reese: I ruined dinner! He was like, “I don’t know dude, I’m gonna have to go check the math.” What’s there to check, bro? We just divided the rent by the appraised value, that’s all we did! And he was like, “I don’t know… man I just hate money and finances! Honey, should we sell that rental?” And he was just getting really hot and bothered by it. I’m like oh no… there goes dinner! You should have ordered the cheesecake; let’s get this all better. So he ordered six desserts and he’s binging on sugar… I’m just kidding, that didn’t actually happen. Literally, guess what now? The house is on the market. And this has happened like ten times in my career; I can think of ten times where I have sat down, showed someone the rate of return they are getting on their property, and then they go sell it once they actually know the rate of return. I’m not saying real estate is a bad investment; he shouldn’t have done that. I did not tell him to sell the property; there is nothing wrong with making 3-4% in rental income, because that isn’t the total return: there’s an appreciation value that might be there, and there’s an annual inflation that could occur. I just saw a property inflation value report from my brother-in-law who sent it to me in a text yesterday, and it was showing how the national average of real-estate inflation is going to be pretty significant, and this particular report had it over a four-year period. It was 3-3.5% a year for the next four years, and some markets were much higher!

Ryan: I think using the phrase “passive income” gets oversimplified. In that example, someone had just over-simplified it, didn’t actually know the numbers behind it and the data behind it. And I think that’s the point of it too, not to charge down some path and oversimplifying that “I have to go do this thing, because that’s what passive income is.” I was just going to ask, what are some examples of other things that create passive income? The other big question is what is appropriate for a dentist to do? Because there are probably a dozen different ways to create passive income with different kinds of investments, but it does not mean a dentist should pursue this. I think about this all the time. You’ve already spent a decade of your life in school; you’re multiple six figures in debt, maybe seven figures in debt, for this one specific career that has a great return, and a great income, and tremendous longevity, and sustainability; it’s very consistent. There’s a lot of things you can do, but it doesn’t mean you should do them. Let’s talk about that: what are some other ways that passive income can be created? And by passive income—again, it’s kind of a buzz word, and I hate it—it’s just like how can you just get income out of something else?

Reese: Well, in brace, there are two things that I want to say about this. One: every asset creates passive income. If it doesn’t create passive income, then it’s not an asset. For example, there’s a big concept in investment called total return vs. dividend investing in the stock market, which means that instead of looking at the income you’re getting, or the dividend you’re getting, you have to look at the total return of the investment, because some stocks grow, and then some pay income. Like Johnson and Johnson, you know, they sell toilet paper and toothpaste, and so they are not going to grow a lot, because they sell 90% of the United States’ toilet paper and toothpaste. That’s a really big exaggeration, but…

Ryan: They won’t grow a lot, okay? It’s not a stock prediction, but the way; don’t go trade on that.

Reese: They are not going to grow a lot, and they are not forecasting a lot of growth, they are just saying that they’re kicking off consistent income, so it’s something that someone would buy who wants to have some stability in their portfolio. But that income that they are receiving is not as high of a return as another investment like a company that is in the technology industry that is growing but pays no income, right? A lot of times investors focus on income: they’ll buy the dividends, they’ll buy this Johnson and Johnson stock because they’re like “I need dividends, I need income.” Over a five to ten-year period, the one that grows the most is really the one that created the most passive income, because income is something you can artificially create with any asset. You could say “my stock went up, I’m going to sell a piece of it, and now I’m going to take it and put it in my account.” That’s passive income. Something that’s growing: that’s passive income. A business that never generated a dime of profit can be one of the highest generators of passive income ever. Think about Amazon and Jeff Bezos: never in his life has he owned Amazon and Amazon has actually paid a profit out to shareholders. There’s been some artificial accounting-based profits that have occurred in the last several years, but for a majority of the holding period, that thing was just growing like crazy. When he wanted passive income, he just sold a chunk of his massively-growing company, and he lived on it.

Ryan: And it was more than his spending.

Reese: I think the idea that we are trying to hit here is that every asset should have some level of passive income that it creates, and you have to find a way to harvest that. In some assets like real estate, even in say a hotel that is not at maximum occupancy that has all this rent coming in from 70-80% occupancy in your building, but you have a big piece of debt to service, that property, as it has grown and gotten to full capacity, has actually appreciated a lot and it has become worth a lot of money; you may have never actually received any income from it above and beyond the debt service on the building, but the value of that property is so much more now that by selling a little piece of it to other shareholders, you’re able to get some passive income along the way as you get occupancy to grow. So, I think this is point we’re trying to make: don’t think of the actual receipt of cash as passive income. Think of the asset itself, and try to understand if it is appreciated, or if it’s kicking off income. Things that kick off income tend to not appreciate as much. If it kicks off actual income, that’s because the business or the asset does not know what to do with the extra money. If a rental property could just keep the rent, put it back into the house, and have the house go up more, that would be actually more tax efficient than paying out the rent to the owner.

Ryan: Yeah, reinvest the rent into the property and make it more valuable, but you can only add on so many bedrooms before it is not going to—

Reese: Yeah, or only put on so many Brazilian cherry hardwood floors before you are no longer getting value out of it. So, the reasons that some assets don’t pay out cash is because they have places to put the money that create more passive income, or more growth than they would get if they just paid out the dividends to the owners.

Ryan: I like that “passive income” simply means that there is money that you can get that simply exceeds your expenses.

Reese: The only places you can really put money are either in a business, in real estate, or in a security of some kind: some public, private, or liquid cash bank account, or mutual fund, or ETF, or stock, or bond. You can only do those things. To me, all these income sources are not equal; if I make 7% in each of them, they are not equal 7% returns to me. 7% of real estate still carries very different risks to me—liquidity issues, liability, costs… and the business has different risks. So, I would just say that the most passive income, as in the safest, most stable place to get passive income, is going to be in a highly liquid public security that is super conservative. To me, that is better than real estate, because I literally have the maximum amount of control and protection from liability, from taxation, and from deferred capital gains… if I just paid all my taxes and I have this pot of money, and I put it in a municipal bond that is giving me tax-free income for the rest of my life, and I have access to the whole principle of growing capital in as small of quantities as I need…

Ryan: It is like being able to take rent money from your real estate, but also going to the bank and saying, “I want $5,000 out of the equity of my house,” too. They just make it worth a little bit less, and they will give you the money.

Reese: Yeah, without borrowing it, or anything. And I’m not saying that real estate would be a bad alternative, but I’m just saying that if you said to me that in both cases I had five million dollars, and I could have five million dollars inside of municipal bonds, or five million dollars inside of real estate equity, I mean—

Ryan: And some people might just have a personal preference for what they enjoy more, but there is a tangible, measurable trade-off between liquidity, risks, costs, and control—

Reese: I would say that the real estate equity of five million should be giving me a much higher rate of return then. I want a much higher rate of return out of the real estate than I would want out my municipal bonds, because they are a very different risk profiles, access to the money is different, but both create passive income. One is probably just creating passive more in the 3-4% range, and that might be the ten-year average (right now it is probably more like 2.5-3.5% range), and that’s tax free. And the other one might be creating passive income at the 4-5% range, but I’m paying tax on it, and then I also get appreciation on my real estate. There is more volatility, but there is more upside. And people that want passive income can also get it from something as simple as a municipal bond portfolio, or a bond portfolio, or even a stock portfolio. It pays off, like we said before. I just think it is important to acknowledge that passive income can be a receipt of anything from any asset.

Ryan: So, one of my questions would be this: what are some of the mistakes you see dentists making when they make assumptions about what passive income is or is not? And they will sometimes pursue a path that they might not have any interest in, that they don’t have any time to pursue, that they don’t have the skill set or expertise for, that might be expensive to outsource—

Reese: It is like your story from the beginning that you were talking about, with the… what is it, the bean counter? What was his name?

Ryan: Yeah, the bean counter! No, the brick maker guy. Yeah, that is the message we want to say: you don’t want to do something to the detriment to the career that you are building in dentistry, and the skillset, and your dollar-per-hour value that you have built in dentistry after all that school and debt, right? And you don’t want to do it in the name of “passive income” as this simplistic view that there is only one way to go do it, even though you don’t want to go buy buildings, and you don’t want to manage real estate, and you don’t want to take the risk, and you don’t want to put up the capital for it. That is why some people are going to say, “well you’re biased to say this because you get paid to do this, this is what your business does,” but that is why I really believe that capital markets, public markets, stock markets, are probably the best asset class for the average dentist out there, because it is very inexpensive to access, you have full control, it’s full transparency, it’s full liquidity, the rate of returns compared to other asset classes over times are really great.

Reese: Well we could have a debate about this, but nine out of ten academics will say that the public equity market return far outweighs and other asset class; it’s the highest rate of return of any asset class. Now it is more volatile, potentially…

Ryan: That is the price that you have to be willing to pay. I was going to say that it’s also relatively cheap to outsource completely; you can capitalize on all that sacrifice, money, and time that you’ve put in to building a dental practice and outsource building wealth in this asset class completely for really a relatively cheap cost. I mean, if you had to hire a professional to build you a real estate portfolio, to find, manage, and build multiple properties, you would pay that person a lot more money than you would pay a financial advisor to manage your stocks, bonds, and mutual funds. It is just an efficient way to grow wealth at a very fantastic rate over time. The main cost, though, is the fact that it goes down more than people think it does, and it is more volatile than people think it is, and people are always surprised and shocked when markets go down, as if that is not supposed to happen, so the biggest cost you have is your willingness to be patient and withstand those emotions when it does has the volatility that it does. That’s the nature of it. But if you have the right expectations up front about that, then that is the real cost to bear, and it is just such an efficient asset class to do that. But, we are biased, so…

Reese: Well, I would say that I am not biased, because I am just not a biased person, but I can say this objectively that people who really succeed in real estate just have a deep passion for it; they just love it, and they feel more comfortable with it, and they have a lot of time to dedicate to it, and that has become one of the main focuses of their lives. People who invest in real estate with a part-time focus and give it the concentrated 5-50 hours of time to try to acquire a property, and then outsource to property managers to try to passively manage a real estate portfolio, they tend to be unaware of the returns, and of the exact financial consequences of their portfolio of properties, and sometimes they mismanage them. I would say they if you’re going to be a really successful estate investor, which I think is a really conscious decision that you have to make as an investor if you want to do that–

Ryan: Yeah, you don’t spend 40 hours of week at a practice and also build a massive real estate portfolio.

Reese: There are a lot of dentists that have significant real estate holdings, and that is their focus.

Ryan: Think about the ones who have, though. They had to sacrifice things in their practice and family life; I think about some clients that we have who have quite a few real estate holdings that have been paid off over their careers—their sacrifice that they made was having such low spending, taking all of their money, and burying it into properties. They are spending like 1/3 of what the average person spends to pull that off. They are not part-time, passive sacrifices that are easily made; that’s very conscious.

Reese: And the business sacrifices too. With that same entrepreneurial zeal, ambition, and money that they spend on the real estate, their business could have also been exponentially higher in value. It takes a lot of effort to think about how to scale a dental practice into a large operation with multiple practices with intellectual property that is unique to that brand, and that has an attractive EPITDA multiple for investors to acquire… for the average dentist that we are speaking to in this podcast, the question that they are asking is “should I be in real estate or not? Am I missing out on something, and am I being dumb for not doing it?” And all we are saying is, “you’re building passive income.” I met with someone yesterday who is forty years old, and their stock income grew forty times what they spent last year. And now, last year was a good market year, so it was above average.

Ryan: Was that your doing? Did you pick all the right stuff?

Reese: The general broad market grew last year enough to pay for four times what a person spends in a year. They are financially independent, and all they have is a very diversified stock and bond portfolio. And that is far outpacing their spending. Here is a final point I was going to make: if you just take the true definition of passive income, the thing that stands out to me about the word “passive” is that I literally have to do nothing to have it happen. I don’t want to do anything, meaning I want to have someone else have to deal with this. In real estate, it is much harder to get to where you are in a truly passive position around your properties, because there are just a lot of decision that have to be made that are uniquely decisions that most property owners want to make, meaning repairs, maintenance, and tenant swapping.

Ryan: And it’s usually more property than you would expect in order to create something that is going to replace your spending in the future.

Reese: Where a public equity or a public bond portfolio—literally, this client has not done anything except for put money into it for ten years and will not doing anything for the next thirty years. There is zero involvement; all they do is vacation, and they just enjoy their practice. A truly passive income… academically, many people make the argument, and we do, that the public equity markets and public bond markets create a true separation between liability and the assets, and a way for people to really forget about being involved in this asset. That is attractive for most dentists; I’m not saying that it is always the highest return, because you can get passive income from building a business, from building up property, or from building up public securities. The business and the real estate holdings just require a lot more out of you; you’ve got to be much more involved; it is not truly independent in nature. Anyone who owns a company, you’re not saying “well I only show up one day a week, or two or three days a week.” Even if you show up zero days a week, you’re getting phone calls, and you are having to make decisions, and a public markets portfolio doesn’t ask you to do that stuff. They assume that you are completely done and disengaged; they are doing all the work for you.

Ryan: Thanks for your thoughts, Reese. I think we can harken back to the original quote of “be an adult and watch your spending.” That’s the biggest way to really handle your future passive income; it’s just have the equation. So, be an adult, grow up, and watch your spending. (laughs) That’s a little harsh. Anyway… everyone, thank you for listening. If you would like to get in touch with us, if you have any questions, if you want to talk about what you’re doing to build your future retirement, and your business, and your future passive income, you can give us a call any time at 833-DDSPLAN. You can schedule a free consultation with us on our website at dentistadvisors.com, and when you go there, there is a little button that says “Book Free Consultation.” And we’d also love to have your questions for the Dentist Money™ Show, so if you go to dentistadvisors.com, click on podcast, there is a button that says “Submit a Question.” Thanks again, and we will see you soon!

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